THE BIG STORY. How mutual funds fared in 2015

Conventional wisdom demands that one invests in large-cap-oriented mutual funds to contain losses or clock gains in volatile and/or falling markets.

But in a shaky 2015, mid and multi-cap funds have, ironically, ruled, with most of them keeping their head high above water. The best among them managed to touch even double-digit returns.

With debt markets getting a boost from impending interest rate cuts in the domestic market, equity-oriented balanced funds (funds which invest up to 35 per cent of their portfolio in debt and the rest in equities), too, got a helping hand. Both these trends left large-cap-oriented funds a few shades paler.

However, equity mutual funds as a category have not disappointed so far in 2015 (data as on November 13, 2015). Even as the broader markets represented by the Nifty 500 and BSE 500 indices tanked 3-4 per cent and the bellwethers Nifty 50 and Sensex dropped by a much higher 5-6 per cent, mutual funds have, once again, proved to be safer bets.

The 170 diversified equity funds currently in existence clocked an average return of 0.23 per cent, beating the indices by a handsome margin; 80 per cent of the funds bettered the returns of the broader indices and 95 per cent of them, the returns of the bellwethers.

More importantly, 87 of the 170 funds or roughly one in every two funds, has delivered positive returns. Here are five trends that our analysis of the performance of equity mutual funds so far in 2015 has thrown up:

High risk, high return works While the broader indices and the bellwethers spewed pessimism in 2015, the Mid-cap indices emerged more optimistic, moving up 1-2 per cent in this period. Small-cap indices managed to contain losses better than the Nifty 500/BSE 500 and Nifty 50 /Sensex too.

These indices seem to have carried forward a part of the enthusiasm they showed in 2014, when they rose 50-60 per cent, buoyed by hopes of a conducive business environment after the change of government at the Centre.

Expectation of a quick economic recovery which, in turn, would create demand, improve capacity utilisation and reduce debt burden for small and medium companies pushed up these stocks. Into 2015, corporate earnings became stagnant and growth remained elusive; global cues turned red with China slowing down and the US Fed rate hikes looming large. Yet, while some mid- and small-cap stocks corrected, many managed to hold on or move further up too.

Easing raw material costs for companies due to a commodity meltdown and signs of a pick-up in demand in some sectors, such as autos and consumer durables, lent a helping hand. Software and pharma also helped as defensive bets.

Hence, mid and small-cap funds have emerged winners, with eight out of the top 10 performers being from these segments. Funds such as DSPBR Micro-Cap, SBI Small and Midcap, SBI Magnum Mid-cap, Mirae Asset Emerging Bluechip, BNP Paribas Mid Cap and Reliance Small Cap have stolen the show this year.

Two-thirds of the mid-cap funds outperformed the BSE/Nifty Midcap 100 indices, while 37 of the 39 mid-cap funds bettered the Nifty 500/BSE 500 returns.

Apart from pure mid-cap funds, multi-cap funds, which rove across market capitalisations to select the best stocks, also did well by latching on to the flavour of the season. Funds such as L&T Value, SBI Magnum Multicap, ICICI Pru Value Discovery and ICICI Pru Multicap, are among the top quartile performers.

Balanced funds shine If balanced funds (equity-oriented) were meant to contain losses for investors who cannot stomach high risk, they did more than that in 2015. For one, thanks to the rally in sovereign bond (government security) prices, equity-oriented balanced funds that timed their exposures to this segment well, clocked good returns. Besides, these funds received a leg-up from investments in higher yielding corporate bonds/NCDs, which also saw healthy rating upgrades during the year.

By managing their asset allocation well, funds such as L&T Prudence, Reliance Regular Savings - Balanced and Franklin Balanced have gained 4- 6.5 per cent, on par with chart busters among diversified equity funds. Take L&T Prudence, the top-performing fund in this category, for instance. As government security yields dropped from about 9 per cent in early 2014 to around 7.5 per cent now, the fund ramped up its holdings in this space sharply, taking it up to 26 per cent and gained from the rally in bond prices. While it still holds about 16 per cent in government securities, it has upped its corporate bond/non-convertible debenture exposure in recent times to take advantage of higher rates in this segment.

Large-cap-oriented funds are preferred in volatile and falling markets due to the stability and earnings visibility that they provide. They lived up to this expectation during 2013, when markets remained just as iffy and the bellwethers and the broader indices ended the year with small gains. But this year, mid-caps continued to hold buyer interest on expectations of greater upside if earnings recovered.

Large-cap funds outsmarted Yet, a handful of large-cap funds, such as Franklin Prima Plus, Franklin Bluechip, Kotak 50, Kotak Select Focus, SBI Magnum Equity and SBI Bluechip, did manage positive returns of 1-5 per cent. Kotak Select Focus, for example, clocked positive returns by reducing equity exposure gradually to less than 90 per cent and adding to cash/debt allocations. Increased allocations to private sector banks and autos, which did well this year, also helped.

But many other large-cap-oriented funds were outsmarted by the mid-caps. Funds often recommended as best bets for investors with a lower risk appetite, such as UTI Opportunities, UTI Equity, HDFC Top 200, HDFC Equity, ICICI Pru Dynamic , ICICI Pru Focused Bluechip, Quantum Long-Term Equity and Birla Sun Life Frontline Equity, all recorded erosion in their NAVs (net asset values). Funds such as UTI Opportunities and the two HDFC funds mentioned above lost 5-6 per cent in their NAVs, as much as the bellwethers. For many, large losses in sectors such as metals, infrastructure and real estate have resulted in underperformance of funds that bet on early turnaround in these sectors.

This is what happened with ICICI Pru Dynamic, often deemed a safe bet in volatile markets. Despite taking cash/debt calls by up to 20 per cent of its portfolio during the year, the fund’s decision to invest in beaten-down sectors, such as power and metals, instead of defensives, didn’t work.

Defensive sectors score With the markets moving up on one day and paring gains the next, funds from defensive sectors, such as pharma/healthcare, software and MNCs, have done well this year. MNC stocks, as has always been the case, continued to command a premium in the markets in 2015. At 14 per cent and 12 per cent, the returns of Birla Sun Life MNC funds and UTI MNC funds, respectively, are higher than even the top performers in the mid-cap category. SBI Pharma and Reliance Pharma have clocked 20 per cent and 15 per cent returns, respectively. This trend is in contrast to 2014, when cyclicals reigned supreme. Banking and Financial Services funds, along with the UTI Transportation and Logistics fund, were toppers then.

New brooms sweep clean Finally, 2015 also saw many new funds (those with less than a five-year track record) emerge winners. Motilal Oswal Focused Midcap 30 and Focused Multicap 35 funds gained 11 per cent, earning a place in the list of top 10 diversified equity funds. Launched only in early 2014, these two funds have already garnered assets worth ₹800 crore and ₹2,900 crore, respectively. For the Midcap 30 fund, concentrated bets on winning stocks in the mid-cap space such as Max India, Page Industries, Ajantha Pharma, Amara Raja Batteries and Wabco, worked well. The Multicap 35 fund earned its stripes from betting big on private banks, autos and software.

Outside of these two, new funds such as IDBI Diversified Equity (launched March 2014), Edelweiss Emerging Leaders (launched August 2011) and PPFAS Long-Term Value fund (launched May 2013) also find a place in the top quartile of diversified funds by returns.

Does this mean that the winning funds of 2015 are the best bets for an investor right now? Not necessarily. Read Should you choose the toppers to know why.

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